Italy economy: IMF says country has 'two lost decades' of growth

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Headquarters of Monte dei Paschi di Siena BankImage source, AFP
Image caption,
Problems with Italy's banks are not helping the economy

Italy's economy will not return to the levels seen before the 2008 financial crisis until the mid-2020s, the IMF has said, implying "two lost decades".

By the mid-2020s, it says the economies of other eurozone members will be 20-25% larger than levels seen in 2008.

The Fund's comments came as it cut its growth forecasts for the eurozone's third largest economy.

It now expects Italy's economy to grow by less than 1% this year, compared with an earlier estimate of 1.1%.

The IMF also cut its growth forecast for 2017 to about 1% from 1.25%.

Italy has an unemployment rate of 11% and a banking sector in crisis, with government debt second only to that of Greece.

Italian banks are weighed down by massive bad debts, and may need a significant injection of funds.

The IMF said any recovery in the Italian economy was likely to be "fragile and prolonged", adding that the authorities faced a "monumental challenge".

"The recovery needs to be strengthened to reduce high unemployment faster and buffers need to be built, including by repairing strained bank balance sheets and decisively lowering the very high public debt."

Speaking after the release of the report, Italian Prime Minister Matteo Renzi said that Britain's vote to leave the European Union would add pressure to all countries in the eurozone.

"Growth estimates are down after the Brexit," he told Italian radio station RTL. "Europe's economy will slow briefly, but in the mid-term the English are the ones who will feel the damage the most."

Image source, Getty Images
Image caption,
Italian Prime Minister Matteo Renzi says the country's banks are being singled out unfairly

Analysis: Julian Miglierini, BBC News, Rome

"Italy is not the sick man of Europe", Italian Prime Minister Matteo Renzi said on Tuesday - trying to fight back the perception that his country's economic woes constitute the most severe threat to the eurozone this summer.

On both main concerns - Italy's troubled banks and low growth estimates - the prime minister has this week deflected the attention (and blame) elsewhere.

On Monday, he said that the Italian banks were being unfairly singled out - since other European banks had much bigger problems. Many interpreted this as a swipe at Germany's Deutsche Bank, which is dealing with its own troubles.

And on Tuesday, Renzi blamed low growth estimates on the uncertainty that has followed the UK's decision to leave the European Union, and said it would be the UK, and not Italy or the EU, who would pay the highest cost.

The increasing fears over Italy's economy couldn't come at a worst time for Renzi.

He's fighting a rise in the polls of the Five Star protest party and the increasing prospects that he may lose a referendum over a major constitutional reform he has called for later this year.

Luring banks

Last week, the IMF cut its growth forecast for the eurozone as a whole because of the expected impact of the UK voting to leave the EU.

It now expects the eurozone's economy to grow by 1.6% this year and 1.4% in 2017. Before the referendum the IMF had predicted growth of 1.7% for both years.

Mr Renzi said that Italy would try to lure financial institutions who decide to leave London in the wake of Britain's departure from the EU.

There has been speculation that banks will move European headquarters out of London, currently Europe's largest financial centre, because they would no longer have access to the passporting system.

This allows them to offer financial services across all EU nations without having a permanent base in each country.

"We are trying with (Milan's mayor) Beppe Sala to bring to Milan a small part of the financial institutions that are in London," Mr Renzi said.

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